Commercial Investment Real Estate is the magazine of the CCIM Institute, the leading provider of commercial real estate education. CIRE covers market trends, current developments, and business strategies within the commercial real estate field.
Issue link: http://cire.epubxp.com/i/536709
29 July | August | 2015 CCIM.com overseas will sink the U.S. expansion, but a dramatic move in either one could certainly cause problems. Looking past the temporary drags, the core of the U.S. economy remains strong. Both households and businesses have done a tremendous job healing their balance sheets, as evidenced by low debt-service ratios, plunging delinquency rates on monthly mortgage payments, and near-record cor- porate prof ts. Consumer conf dence, which correlates well with occupancy levels, has been inching its way back over 100 — as robust as it was during the strong real estate years of 2004–2007. With lower gas prices ef ectively stuf ng an extra $100 bil- lion into Americans' pockets this year and with the onset of warmer weather, consumer spending is poised to drive stron- ger economic growth. T e signs of pushing past the f rst-quar- ter blues are already appearing. Retail sales in March were bet- ter (+0.9 percent over February), existing home sales in March were better (+6.1 percent year-over-year), job growth in April was better (223,000 net new nonfarm jobs versus 85,000 the month before). In summary, the strong economic DNA that has been driving the improvement in commercial real estate fundamentals for the past several years remains f rmly intact. Widespread Rent Growth Is Upon Us For most owners, the bulk of this commercial real estate recovery has been less about growing rents and more about f nding a way to lease up an empty building in what seemed like an endless f eet of empty buildings. T ere were a few exceptions, of course. Tech- and energy-fueled markets, such as San Francisco and Houston, began observing mean- ingful of ce rent growth in early 2011. Apartment rents have also been appreciating at decent clip in most cities since 2011. In general, high quality space across all sectors has seen some mild upward movements. But those were the aberrations. It was not widespread; just a few one-of s here and there. T at is all about change. Let's take the of ce and industrial sectors as examples. Of ce. T e U.S. of ce sector hasn't had a robust recovery, but it has been consistent. Net absorption has been positive for four straight years, averaging 13 million square feet per quarter. Not great, but good enough to drive vacancy down almost 300 basis points to 14.4 percent as of 1Q 2015 from 17.1 percent in 2Q 2010. For context, vacancy is now lower than it was in 2005. In 2005, of ce rents grew by a solid 2.5 percent. T e rent growth story is no longer limited to tech and energy hubs or gateway cities. For example, asking rents in Atlanta grew by nearly 10 percent in 1Q15. Fort Lauderdale, Fla., Louisville, Ky., Nashville, Tenn., and Oakland, Calif., all have 5 percent rent growth or better. Yes, tech markets are still leading the way. San Francisco put another 17 percent rent growth number on the board in 1Q15. And no, not every single market is going to see rental appreciation. Houston, which has led many markets in com- mercial real estate for the past f ve years, will be negatively impacted by the plunge in oil prices. Northern Virginia, the core of the private defense industry, is still recovering from the sharp federal budget cuts. But with new development across the country still 30 percent below its 2005 peak, and with of ce-using job growth the strongest it has been in 15 years, more than 80 percent of the U.S. of ce markets DTZ tracks will observe rent growth by the end of 2015. Industrial. If there is any sector that can rival the top performer — the multifamily sector in this recovery — it is the industrial sector. Industrial is f at out booming. Last year the industrial sector absorbed 162 msf of space — the second highest pace on record dating back to 1990. Not U.S. Investment Sales Soaring $700 $600 $500 $400 $300 $200 $100 $0 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 Q1 2015 All Property Types Annualized Estimate $574 $618 Billions Source: Real Capital Analytics, DTZ Research Peak 2007 Current 2015Q1 % chg Apartment 183 230 +26% Industrial 166 164 –2% Retail 187 171 –9% CBD Offi ce 199 242 +22% Suburban Offi ce 160 140 –12% Sales on Record Pace RCA Price Index Pricing Recovery Uneven